Global Journal of Management and Business Research Vol. 10 Issue 7 (Ver 1.

0) August 2010 P a g e | 19

GJMBR Classification
FOR:140303,150205
JEL:011,016,F31,F36,G32,H44
Impact OI Macro-Economic Variables On Stock
Prices In India
Gagan Deep Sharma (Corresponding Author), Mandeep Mahendru
Abstract- The paper analyzes long term relationship between
BSE and macroeconomic variables, vis--vis, change in
exchange rate, foreign exchange reserve, inflation rate and gold
price. The multiple regression equation model (Galton, 1877) in
order to investigate the relationship among these factors. The
period of the study is 1anuary 2008 to 1anuary 2009. Results
reveal that there is high correlation between the empirical
results reveal that exchange rate and gold prices highly effect
the stock prices on the other hand the influence of foreign
exchange reserves and Inflation on the stock price is upto
limited extend only.
I. INTRODUCTION
he movement oI stock indices is highly sensitive to the
changes in Iundamentals oI the economy and to the
changes in expectations about Iuture prospects. Expectations
are inIluenced by the micro and macro Iundamentals which
may be Iormed either rationally or adaptively on economic
Iundamentals, as well as by many subjective Iactors which
are unpredictable and also non quantiIiable. It is assumed
that domestic economic Iundamentals play determining role
in the perIormance oI stock market. However, in the
globally integrated economy, domestic economic variables
are also subject to change due to the policies adopted and
expected to be adopted by other countries or some global
events. The common external Iactors inIluencing the stock
return would be stock prices in global economy, the interest
rate and the exchange rate. For instance, capital inIlows and
outIlows are not determined by domestic interest rate only
but also by changes in the interest rate by major economies
in the world. Burning example in India is the appreciation oI
currency due to higher inIlow oI Ioreign exchange. Rupee
appreciation has declined stock prices oI major export
oriented companies. InIormation technology and textile
sector are the example oI Ialling stock prices due to rupee
appreciation.From the beginning oI the 1990s in India, a
number oI measures have been taken Ior economic
liberalization. At the same time, large number oI steps has
been taken to strengthen the stock market such as opening oI
the stock markets to international investors, regulatory
power oI SEBI, trading in derivatives, etc. These measures
have resulted in signiIicant improvements in the size and
depth oI stock markets in India and they are beginning to
play their due role. Presently, the movement in stock market
in India is viewed and analyzed careIully by large number oI
global players. Understanding macro dynamics oI Indian
stock market may be useIul Ior policy makers, traders and

About
1
-(Coordinator, Department of Management
Studies,BBSBEC,Fatehgarh Sahib)angrishgagangmail.com,
919915233734
About
2
-(Senior Lecturer, GJIMT, Mohali)mandip129gmail.com,
investors. Results may reveal whether the movement oI
stock prices is the outcome oI something else or it is one oI
the causes oI movement in other macro dimension in the
economy. The study also expects to explore whether the
movement oI stock market are associated with real sector oI
the economy or Iinancial sector or bothWe analyze the long
term relationship between BSE and certain macroeconomic
variables. We use the regression equation model (Galton,
1877) in order to investigate the relationship among these
Iactors. Results reveal that there is high correlation between
the empirical results reveal that exchange rate and gold
prices highly eIIect the stock prices on the other hand the
inIluence oI Ioreign exchange reserves and InIlation on the
stock price is upto limited extend only.
II. OBJECTIVES OF THE STUDY
The paper aims at the Iollowing objectives:
1)To explore the major macro economic variables.
2) To study the eIIect these macro economic variables on
stock price
3) To study is their any correlation between stock price
and macro economic variables.
III. REVIEW OF LITERATURE
This papers contributions are as Iollows. First by embracing
a study period that extends beyond January 2008, this paper
provides the Iirst attempt to analyze the health oI stock
market near to the elections. The time period examined by
existing studies on time series behaviour oI BSE do not
cover the post election period. Naka(1990) employed a
vector error correction model (VECM) (Johansen (1991)) in
a system oI Iive equations to investigate the presence oI
cointegration among these Iactors. analyzed a negative
relationship between interest rates or inIlation and stock
prices, and a positive relation between output growth and
stock prices. Sharma (2008) tests weak Iorm oI eIIiciency oI
the BSE. Bhattacharya (2001) by applying the techniques oI
unitroot tests, cointegration and the longrun Granger non
causality test recently proposed by Toda and Yamamoto
(1995), tests the causal relationships between the BSE
Sensitive Index and the Iive macroeconomic variables, viz.,
money supply, index oI industrial production, national
income, interest rate and rate oI inIlation using monthly data
Ior the period 1992-93 to 2000-01. They Iound that (i) there
is no causal linkage between stock prices and money supply,
stock prices and national income and stock prices and
interest rate, (ii)index oI industrial production lead the stock
price, and (iii) there exists a two way causation between
stock price and rate oI inIlation. Mishra (2004) by using
monthly data Ior the period 1992 to 2002, examined the
T
P a g e |20 Vol. 10 Issue 7 (Ver 1.0) August 2010
Global Journal of Management and Business Research

relationship between stock market and Ioreign exchange
markets using Granger causality test and Vector Auto
Regression technique study suggested that there is no
Granger causality between the exchange rate return and
stock return. Ray (1993) attempt to unravel the relationship
between the real economic variables and the capital market
in Indian context by using modern non-linear technique like
VAR and ArtiIicial Neural Network researcher Iinds out that
certain variables like the interest rate, output, money supply,
inIlation rate and the exchange rate has considerable
inIluence in the stock market movement in the considered
period, while the other variables have very negligible impact
on the stock market. Abdalla (1996) investigate interactions
between exchange rates and stock prices in the emerging
Iinancial markets oI India, Korea, Pakistan and the
Philippines. The results oI the granger causality tests results
show uni-directional causality Irom exchange rates to stock
prices in all the sample countries, except the Philippines
Dornbusch(1980) alternative explanation Ior the relation
between exchange rates and stock prices can be provided
through portIolio balance approaches that stress the role oI
capital account transaction He Iound that rising (declining)
stock prices would lead to an appreciation (depreciation) in
exchange rates. Chen (1986) have argued that stock returns
should be aIIected by any Iactor that inIluences Iuture cash
Ilows or the discount rate oI those cash Ilows by using
discounted cash Ilow or present value model (PVM) the
researcher tries to relate the stock price to Iuture expected
cash Ilows and the Iuture discount rate oI the cash Ilows.
Again, all macroeconomic Iactors that inIluence Iuture
expected cash Ilows or the discount rate by which the cash
Ilows are discounted should have an inIluence on stock
price. Sangeeta Chakravarty indicates that there is no causal
relation between stock price and exchange rate. Similarly
there is no causal linkage between gold price and stock
price. Sahid Ahmed (2008) using quarterly data . Johansen`s
approach oI cointegration and Toda and Yamamoto Granger
causality test have been applied to explore the long-run
relationships while BVAR modeling Ior variance
decomposition and impulse response Iunctions has been
applied to examine short run relationships. The study reveals
that the movement oI stock prices is not only the outcome oI
behaviour oI key macro economic variables but it is also one
oI the causes oI movement in other macro dimension in the
economy. Mukherjee(1995) and Bernanke(2005)argue that a
change in the money supply provides inIormation on money
demand, which is caused by Iuture output expectations.
Agrawalla (2005) by using VECM (vector error correction
model) has estimated that the share price index and the
macroeconomic variables are cointegrated. Hondroyiannis
(2001) by doing VAR analysis tries to investigate whether
movements in the indicators oI economic activity aIIect the
perIormance oI the stock market Ior Greece. The major
Iindings oI the study is that the domestic market economic
activity aIIects the perIormance oI domestic stock market.
Habibullah et al (2000) determines the lead and lag
relationships between Malaysian stock market and Iive key
macroeconomic variables. Naka (2001) analyses long-term
equilibrium relationship among selected macroeconomic
variables and the Bombay Stock Exchange index. The
results oI the study suggest that domestic inIlation is the
most severe deterrent to Indian stock market perIormance,
and domestic output growth as its predominant driving
Iorce. Pethe (2000) using Indian data Ior April 1992 to
December 1997 reports weak causality running Irom IIP to
share price index (Sensex and NiIty) but not the other way
round. Bhattacharya (2002) investigates the nature oI the
causal relationship between stock prices and
macroeconomic aggregates in the Ioreign sector in India. By
applying the techniques oI unitroot tests, cointegration and
the longrun Granger noncausality test recently proposed
by Toda and Yamamoto (1995)Iinds out that that there is no
causal linkage between stock prices and the variables.
Basabi(2006) investigates the nature oI the causal
relationship between stock returns, net Ioreign institutional
investment (FII) and exchange rate in India and Iinds out
that that (a) a bi-directional causality exists between stock
return and the FII, (b) unidirectional causality runs Irom
change in exchange rate to stock returns (at 10 level oI
signiIicance), not vice versa, and (c) no causal relationship
exist between exchange rate and net investment by FIIs.
Chatrath (1997) study a negative relationship between stock
market returns and inIlationary trends has been widely
documented Ior developed economies in Europe and North
America. This study provides similar evidence Ior India.
Horobet Livia (2007) explore the interactions between
exchange rates and stock market prices applied to Romania,
one oI the emerging economies in Central and Eastern
Europe and a new member oI European Union since January
2007. The study uses standard bivariate cointegration tests,
using both the Engle-Granger and the Johansen-Juselius
methodology, as well as standard and modiIied Granger
causality tests. . The analysis involved the January 1999
June 2007 period, but also two sub-periods (January 1999 -
October 2004 and November 2004 June 2007) to take into
account the alteration oI the Romanian Ioreign exchange
market occurring aIter the end oI 2004.The results indicate
indicates no cointegration between the exchange rates and
the stock prices, the use oI the Johansen-Juselius procedure
suggests the presence oI cointegration between the two
stock market indices and the exchange rates, either nominal
bilateral, nominal eIIective or real eIIective rates. When
standard Granger causality test were perIormed on non-
cointegrated variables, they identiIied unilateral causality
relations Irom the stock prices to exchange rates Ior the
entire period and the second sub-period, and one bilateral
causality relation between the stock prices and the bilateral
exchange rate against the US dollar Ior the Iirst sub-period.
Mazharul H. Kazi (2008) reviewed the recent trends oI
analyzing the relationship between the security market
movement and a priori variables, while retaining the basic
attributes oI asset pricing theory He used the cointegration
approach one can eIIiciently analyze the long-run
relationship between a priori variables (macroeconomic
variables) that are considered as proxy Ior systematic risk
Iactors and security market prices. Mookerjee and Yu
(1997) study the Singapore stock market pricing mechanism
by investigating whether there are long-term relationships
Global Journal of Management and Business Research Vol. 10 Issue 7 (Ver 1.0) August 2010 P a g e | 21

between macroeconomic variables and stock market pricing.
They Iind that three out oI Iour macroeconomic variables
are cointegrated with stock market prices. Nasseh(2000)
study the longrun relationships between stock market prices
(represented by relevant share price indices) and domestic
and international economic activity in six countries that
included France, Germany, Italy, Netherlands, Switzerland
and the UK. and Iind out that although stock prices are
explained by economic Iundamentals in the medium and
short-run, the underlying volatility inherent in stock prices is
related to macroeconomic movements in the long-run.
Mohiuddin (2008) investigated the explanatory power oI
various macro-Iactors on the variability oI stock prices
Multiple regression analysis has been conducted to asses the
relationship No signiIicant relationship has been Iound
between the stock price and any oI the macroeconomic
Iactors. Cheah Lee Hen 3 (2006) makes use oI Kalman Iilter
and variety oI ARCH type models to investigate the
Ieedback causal relationship between stock prices with each
oI currency exchange and derivative product. Since the
development by Kalman and Bucy in 1960s, Kalman Iilter
technique has been the subject oI extensive research and
application. , and Iind out that there is no evidence oI risk-
return tradeoII in the Malaysian stock market. Kandir (2008)
investigates the role oI macroeconomic Iactors in explaining
Turkish stock returns. A macroeconomic Iactor model is
employed Ior the period that spans Irom July 1997 to June
2005 Empirical Iindings reveal that exchange rate, interest
rate and world market return seem to aIIect all oI the
portIolio returns, while inIlation rate is signiIicant Ior only
three oI the twelve portIolios. On the other hand, industrial
production, money supply and oil prices do not appear to
have any signiIicant aIIect on stock returns. okuyan (2008)
investigate the relationship between real macroeconomic
variables and stock prices in Turkey under "Proxy
hypothesis" developed by Fama (1981) The long-run
relationship between the variables is tested by Bound testing
approach developed by Paseran et al (2001).
IV. RESEARCH METHODOLOGY
The study is Iocused on Iour major macro economic
variables vis-a-vis Gold price , Ioreign exchange reserves,
exchange rate and InIlation. We study the impact oI these
variables on the stock prices. Various Iactors played role in
selecting these variables Ior study as recession is heading so
the exchange rate is Iluctuating oIten and at that period oI
time the value oI dollar is also depreciating and the value oI
Gold is appreciating as they have an inverse relationship and
InIlation is also disturbing a lot at that point oI time hence
our study is based on these major economic variables. The
paper presents the brieI description oI macro economic
variables and aIter extensive survey we arrived at a
conclusion that the macro variables mentioned played major
role in the economy .using these variables we try to Iind out
the relationship between BSE prices( as dependent
Variables) and macro variables (as independent variables)
For doing this, we take the stock prices Ior the period Jan
2008 to Jan 2009 are taken into account Macroeconomic
variables used in this study are, change in exchange rate,
Ioreign exchange reserve , inIlation rate and gold price a
multiple regression model is employed to test Ior the eIIects
oI macroeconomic Iactors on stock .The analysis is
conducted by using weekly data Ior the period spans Irom
Jan 2008 to Jan 2009. The data used in the study is divided
into two sub-groups. First data set consist oI stock data
(BSE Sensex). Second data set consist oI macroeconomic
Iactors such as inIlation rate, Ioreign exchange reserve,
exchange rate and gol|d price In this study only Secondary
data is used. Exchange rate data is collected Irom the the
Iederal reserve statistical release. InIlation data and Ioreign
exchange reserve data are obtained Irom Reserve Bank oI
India. Gold price is obtained Irom NASDAQ. BSE. Stock
returns are obtained Irom Bombay Stock Exchange and The
Money Control A stastical technique that simultaneously
develop a mathematical relationship between a single
dependent variable and two or more independent variables.
With Iour independent variables the prediction oI Y is
expressed by the Iollowing equation:
Y'
i
b
0
b
1
X
1i
b
2
X
2i

b
3
X
3i

b
4
X
4i
The "b" values are called regression weights and are
computed in a way that minimizes the sum oI squared
deviations

Y'
i
is the return on the stock portIolio i,
X
1i
is the change in whole sale price
X
2i
is the change in exchange rate,
X
3i
is the change in Ioreign exchange reserve
X
4i
is the change in gold price.
V. CAUSAL RELATIONSHIP BETWEEN THE
MACROECONOMIC VARIABLES AND STOCK PRICES
With the help oI regression analysis we try to interpret the
observation taking stock prices as dependent variable and
macro economic variables as independent.






P a g e |22 Vol. 10 Issue 7 (Ver 1.0) August 2010
Global Journal of Management and Business Research

Table 1
Descriptive Statistics
Descriptive Statistics
Mean Std. Deviation N
Stock Price 13892.4336 3428.08609 55
InIlation Rate 8.4338 2.99887 55
Exchange Rate 43.9260 3.72590 55
Foreign exchange Reserve 285817.25 24888.775 55
Gold Price 870.3231 65.84736 55

Table 1 show that stock price standard deviation is very
high. It reIlects signiIicant variability in stock price.
InIlation rate mean is 8.4338 and standard deviation is
2.99887 implying that there is moderate variability in
inIlation rate. Exchange rate mean is 43.9260 and standard


deviation is 3.72590. So there is not so signiIicant variability
in exchange rate. Foreign exchange reserve mean is
285817.25 and Standard deviation is 248888.775. It shows
that there is moderate variability in Ioreign exchange reserve
.Gold price mean and standard deviation is 870.3231 and
65.84736.There is high moderate variability in gold price.

Table 2
Correlations Matrix






























Table 2 shows correlation oI the stock price with the
InIlation rate, Ioreign exchange reserve and gold price.
Exchange rate correlation is -.943 showing that exchange
rate has high negative correlation with stock price. InIlation
rate correlation is -.189, which reIlects that inIlation very
low negative correlation with stock price. This variable
Correlations
Stock Price InIlation
Rate
Exchange
Rate
Foreign
exchange
Reserve
Gold
Price
Pearson
Correlation
Stock Price 1.000 -.189 -.943 .754 .555
InIlation Rate -.189 1.000 .180 .294 -.224
Exchange Rate -.943 .180 1.000 -.817 -.677
Foreign
exchange
Reserve
.754 .294 -.817 1.000 .653
Gold Price .555 -.224 -.677 .653 1.000
Sig. (1-
tailed)
Stock Price . .083 .000 .000 .000
InIlation Rate .083 . .094 .015 .050
Exchange Rate .000 .094 . .000 .000
Foreign
exchange
Reserve
.000 .015 .000 . .000
Gold Price .000 .050 .000 .000 .
N
Stock Price 55 55 55 55 55
InIlation Rate 55 55 55 55 55
Exchange Rate 55 55 55 55 55
Foreign
exchange
Reserve
55 55 55 55 55
Gold Price 55 55 55 55 55
Global Journal of Management and Business Research Vol. 10 Issue 7 (Ver 1.0) August 2010 P a g e | 23

doesnt inIluence the stock price. Foreign exchange reserve
correlation oI .754 has a positive correlation with stock
price. Gold price correlation with stock price is .555
implying that the gold price has a moderate correlation with
stock price
The relation between inIlation rate and exchange rate is
highly positive to the extent oI .094 but it is less than
1.There is very low positive relation between Ioreign
exchange reserve and inIlation rate to the extent oI .015.
There is moderate positive relation between inIlation rate
with gold price to the extent oI .05. There is no relation
between exchange rate and Ioreign exchange reserve. There
is .0 relation between exchange rate and Ioreign exchange
reserve. Similarly there is not any relationship between
exchange rate and gold price. There is zero correlation
between Ioreign exchange reserve and gold price.

Table 3
Jariables entered
Variables Entered/Removed
Mode
l
Variables
Entered
Variables
Removed
Method
1 Exchange
Rate
. Forward (Criterion: Probability-oI-F-to-enter .050)
2 Gold Price . Forward (Criterion: Probability-oI-F-to-enter .050)
a. Dependent Variable: Stock Price
As in Table 3, multiple regression analysis accepts two variables i.e. Exchange rate and gold price which has eIIect on stock
price.
Table 4

R
2
is a statistic that will give some inIormation about the
goodness oI Iit oI a model. In regression, the R
2
coeIIicient
oI determination is a statistical measure oI how well the
regression line approximates the real data points. An R
2
oI
1.0 indicates that the regression line perIectly Iits the data.

The range oI R
2
is Irom 0to1. In model 1 exchange rate
coeIIicient oI correlation is 0.943. It shows the very high
positive correlation between stock price and exchange rate
R
2
indicates the 88.9 exchange rate has relation with stock
price. The impact oI exchange rate on stock price is
Model Summary
c

Model R R
Squa
re
Adjuste
d R
Square
Std. Error
oI the
Estimate
Change Statistics Durb
in-
Wats
on
R Square
Change
F
Change
d
I
1
d
I
2
Sig. F
Change
1 .94
3
a

.889 .887 1153.91790 .889 423.59
3
1 5
3
.000
.488
2 .95
0
b

.902 .898 1095.47475 .013 6.806 1 5
2
.012 .
a. Predictors: (Constant), Exchange Rate
b. Predictors: (Constant), Exchange Rate, Gold Price
c. Dependent Variable: Stock Price
P a g e |24 Vol. 10 Issue 7 (Ver 1.0) August 2010
Global Journal of Management and Business Research

signiIicant. In model 2, coeIIicient oI correlation (R) is .950
indicating that very high positive correlation between stock
price and gold price. R
2
is 90.2 .The results shows in
model 2 gold price has 90.2 impact on stock price .there is
a signiIicant relation between stock price and exchange rate
and gold priceAdjusted R
2
(sometimes written as ) is a
modiIication oI R
2
that adjusts Ior the number oI
explanatory terms in a model. Unlike R
2
, the adjusted R
2

increases only iI the new term improves the model more
than would be expected by chance. The adjusted R
2
can be
negative, and will always be less than or equal to R
2.

Adjusted R square in model Iirst is .887 which is less than R
square .In model 2 Adjusted R

square is .902 which is less
than R square
Table 5













Anova table examines the diIIerence in the mean value oI
the dependent variable i.e. stock price associated with the
eIIect oI the controlled independent variables. Results show
that there is a signiIicant relation between exchange rate and
stock price. Because I calculated value is greater than the
table value. In model 2 shows there is a signiIicant relation
between dependent variable and independent variable.
Exchange rate and gold price eIIect have signiIicant eIIect
on gold price.
VI. CONCLUSION:
The main objective oI the study is to determine the lead and
lag interrelationships between the stock price and
macroeconomic variables. A number oI studies have Iound
that a relationship exists between macroeconomic variables
and equity market returns. The relationship between stock
returns and macroeconomic Iactors is well documented Ior
developed countries |Chen, Roll and Ross (1986), Chen
(1991), Clare and Thomas (1994), Mukherjee and Naka
(1995), Gjerde and Saettem (1999), Flannery and
Protopapadakis (2002)) and East-Asian (Bailey and Chung
(1996), Mookerjee and Yu (1997), Kwon and Shin (1999),
Ibrahim and Aziz (2003)). There are also cross-country
studies (Cheung and Ng (1998), Wongbangpo and Sharma
(2002)|. These studies have provided diIIerent results. The
results oI the previous studies have changed according to the
macroeconomic Iactors used. This study extends the
literature by considering the eIIects oI macroeconomic
variables on the stock price. In this study, a multiple
regression model is employed to test Ior the eIIects oI
macroeconomic Iactors on stock price Ior the period Jan
2008 to Jan 2009. Macroeconomic variables used in this
study are, change in exchange rate, Ioreign exchange
reserve, inIlation rate and gold price. In the regression
models, stock price are used as dependent variables, while
the macroeconomic variables are used as independent
variables. Empirical result reveals that exchange rate, and
gold price to aIIect the entire BSE Stock price. There is
88.9 correlation oI exchange rate with stock price and
gold price has 90.2 correlation with stock price.
ANOJA
c

Model Sum oI Squares dI Mean Square F Sig.
1 Regression 5.640E8 1 5.640E8 423.593 .000
a

Residual 7.057E7 53 1331526.522

Total 6.346E8 54

2 Regression 5.722E8 2 2.861E8 238.401 .000
b

Residual 6.240E7 52 1200064.938

Total 6.346E8 54


a. Predictors: (Constant), Exchange Rate
b. Predictors: (Constant), Exchange Rate, Gold Price
c.Dependent Variable: Stock Price

Global Journal of Management and Business Research Vol. 10 Issue 7 (Ver 1.0) August 2010 P a g e | 25

Independent variables except inIlation rate and Ioreign
exchange reserve have a signiIicant relation with stock
price. Null hypothesis is rejected. Exchange rate and gold
price seem to aIIect the entire stock price while inIlation rate
is signiIicant Ior only three oI the twelve portIolios. On the
other hand, inIlation rate and gold price do not appear to
have any signiIicant aIIect on stock returns. Null hypothesis
is accepted. It means that inIlation rate and Ioreign exchange
reserve dont inIluence the stock price.
VII. REFERENCES
1) Abdalla, I. S. A. and V. Murinde. (1997).
Exchange Rate and Stock Price Interactions in
Emerging Financial Markets: Evidence on India,
Korea, Pakistan, and Philippines Applied
Financial Economics 7: 25-35
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Real Economy: A policy perspective Ior India Irom
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the 42nd Annual ConIerence oI the Indian
Econometric Society (TIES)
3) Basabi Bhattacharya, Jaydeep Mukherjee (2001)
causal relationship between stock market and
exchange rate, Ioreign exchange reserves and value
oI trade balance: Akron Business and Economic
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Market and Macroeconomic Aggregates in India:
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th
Annual ConIerence on Money and Finance,
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5) Bernanke and Kuttner (2005) What Explains the
Stock Markets Reaction to Federal Reserve Policy
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between macroeconomic variables and the
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Relationship between Macroeconomic Variables
and Stock Price: A Study on Dhaka Stock
Exchange American International University-
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